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Suggestions for Improving a Homebuilder’s Odds of Economic Survival in a Tough Legal Climate
1. Select the appropriate business entity for your operations and be sure that it is properly formed and maintained. 2. Develop and use the appropriate contract forms and addenda and be sure they are properly integrated. 3. Be sure that all key subcontractors have and maintain adequate liability insurance with your building entity listed as an additional insured. Have clear, written agreements with subcontractors that have indemnity clauses in your favor and binding arbitration provisions. 4. Obtain and review all available site information before construction begins. This would include soil reports, aerial photos, subdivision grading plans, easement locations, etc. 5. Don’t cut corners on structural components of the house. 6. Always document changes in the work with written and signed change orders. 7. In the areas with active soils, do a finish floor elevation when the foundation is completed and keep it with your file. 8. Be careful about the content of your marketing materials. Fraud in the inducement, negligent misrepresentation and related tort claims are generally an exception to the economic loss rule. 9. To the fullest extent permitted by applicable law, disclaim or limit the duration of implied warranties. Also, consider filing this disclaimer in the deed records to put subsequent purchasers on notice. Remember, Texas has a ten (10) year statute of repose on residential construction. 10. Give an express, limited warranty that clearly describes what is covered and what is not. 11. Strongly consider including a binding arbitration clause in your contract and/or closing documents. If possible, at closing, file a binding arbitration agreement in the deed records to bind subsequent purchasers of the home. 12. Respond promptly and politely to all warranty requests and keep a record of all warranty service. 13. Respond immediately to any demand letters and remember to put your subcontractors on notice. 14. Always make reasonable efforts to compromise and resolve construction defect claims. Most of the time these settlement offers should be communicated in writing, demonstrate your good faith and to set up a possible failure to mitigate defense. Be proactive!! 15. Have and maintain a good general liability policy to offset costs of defense in the event you are sued. Be sure to review all exclusions from coverage, including those added by way of endorsement. 16. In contracts with customers, consider excluding specific performance as a default remedy. Remember, if your customer becomes dissatisfied before title transfers and files suit for specific performance, he can often cloud the title to your property and prevent or significantly impair a sale to another buyer. If you do exclude specific performance, it is best to put a provision in the contract requiring completion of the improvements within two (2) years of the date of the contract. 17. Consider using a walk-thru and acceptance form that acknowledges inspection, adequacy of construction, and for a stated consideration, releases all claims except those arising under the express warranty. Be sure to show the release consideration on the closing statement as a credit against the sales price.
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